Show pageOld revisionsBacklinksBack to top This page is read only. You can view the source, but not change it. Ask your administrator if you think this is wrong. ======Breaking the Buck====== Breaking the buck is a financial earthquake in what's supposed to be the safest corner of the investment world. The term almost exclusively applies to [[Money Market Fund (MMF)]]s, which are designed to be ultra-stable investments that always maintain a [[Net Asset Value (NAV)]] of $1.00 per share. Think of it like a savings account in investment form. When an MMF "breaks the buck," it means its NAV has fallen below that magic $1.00 mark—say, to $0.99 or $0.97. This signifies that the fund has suffered losses on its underlying investments and can no longer guarantee that investors will get all their principal back. It’s a rare event, but when it happens, it sends shockwaves through the financial system because it shatters the illusion of absolute safety that these funds are built upon. ===== Why Is It Such a Big Deal? ===== You might think, "So I lose a penny on the dollar, what's the big deal?" In the world of MMFs, it’s a //massive// deal. These funds are the bedrock for corporate treasurers and individual investors to park their cash. The entire system is built on trust and the unwavering belief in that $1.00 NAV. ==== The Psychology of Safety ==== Breaking the buck is a psychological blow. It’s like discovering your "unbreakable" piggy bank has a crack in it. Investors treat MMFs as cash equivalents—a place to hold money for payroll, daily expenses, or just to keep it safe. When a fund breaks the buck, panic can set in. Investors, fearing they might lose their money, rush to withdraw their cash en masse. This can trigger a "run" on not just the one failing fund, but on //all// money market funds, as nobody wants to be the last one out the door. This mass withdrawal can freeze up the short-term credit markets, which businesses rely on to function day-to-day. ==== A Canary in the Coal Mine ==== MMFs invest in what are supposed to be the safest, most liquid short-term debt instruments available: things like government [[Treasury Bills]], bank debt, and [[Commercial Paper]] from high-quality corporations. For a fund's NAV to drop, it means these "rock-solid" assets are in trouble. Therefore, a fund breaking the buck is a giant red flag—a canary in the coal mine—signaling deep-seated problems in the credit markets and the broader economy. It tells investors that the foundational level of the financial system is under severe stress. ===== A Famous Case: The 2008 Financial Crisis ===== The most notorious example of breaking the buck occurred during the 2008 financial crisis. On September 16, 2008, one day after the investment bank [[Lehman Brothers]] filed for bankruptcy, the [[Reserve Primary Fund]]—the oldest money market fund in the U.S.—announced its NAV had fallen to $0.97. The fund held a significant amount of commercial paper issued by Lehman Brothers. When Lehman collapsed, that paper became nearly worthless, inflicting a heavy loss on the fund. The news triggered a financial tsunami. Investors pulled over $300 billion out of prime money market funds in a single week. The panic was so severe that the U.S. Treasury had to step in and offer a temporary government guarantee on all MMF balances to prevent a complete meltdown of the short-term lending market. ===== The Value Investor's Perspective ===== For value investors, the concept of breaking the buck reinforces one of [[Warren Buffett]]'s most famous maxims: **Rule #1: Never lose money. Rule #2: Never forget Rule #1.** While MMFs are generally considered a safe haven for cash, the Reserve Primary Fund saga is a powerful lesson that //no// investment is 100% risk-free. It highlights the critical importance of understanding what you own, even in supposedly "boring" investments. A value investor knows that behind every share price is a real, tangible asset. In the case of an MMF, those assets are debt securities. If the issuers of that debt go bust, the fund takes a hit. Since 2008, regulations have been tightened to make MMFs more resilient. Many institutional funds now have a floating NAV (meaning their price can fluctuate slightly) and tools like "redemption gates" to prevent runs. However, the core lesson remains: always do your homework and never take safety for granted. True value investing isn't just about finding undervalued stocks; it's about rigorously assessing risk in //every// part of your portfolio, including the cash you've set aside.